The New Keynesians

This morning, El País ran a headline saying there won’t be a recession in the United States. Reading past the headline, however, it was clear that a recession is exactly what they are expecting–a needless recession however, because a grain of competent economic stewardship would avert it. They don’t see that competent economic stewardship, however. Economics editor Joaquín Estefanía writes:

The trends are ominous–in the last quarter economic growth fell from 4.9 to 1%; unemployment went over the 5% mark for the first time in a long while; inflation rose above 4%; the $2 billion a day in foreign investment is needed to pay debts; real estate is collapsing, along with an increase in defaults, and stricter credit conditions have been put in place as a result of the subprime crisis. Consumer confidence has been falling steadily until it reached its lowest level around Christmas. (Consumers are responsible for two thirds of the GNP.)[my transl.]

On the major capital markets of Europe and East Asia, the alarm bells have been sounding for some time. But back in the United States, ostrich-like behavior prevails.

For most of the last thirty years, Republicans have railed against “Keynesian economics.” What they understood by that term was clear enough—

• a government with at least some dirigiste tendencies, namely, that was involved in closely “managing” the economy, particularly through the adjustment of interest rates

• a mixed economy, namely one which offered market economic features but had a substantial state-owned economy as well, potentially one that moved beyond the core area of government services

• a sense that you could “spend your way out of” an economic downturn

• a lack of fiscal restraint and a limitless tolerance for long-term debt

I am not, by the way, convinced that this really reflects Lord Keynes and his economics. After all, Keynes was quite explicit in stating that he considered the theories of Friedrich August von Hayek to be correct and his own differences with Hayek to be trivial. The views that are summarized as “Keynesian” are very far from the economic principles to which Keynes adhered. Rather they reflect a series of stop-gap measures adopted to deal with a state that was dangerously close to imploding in the face of a global depression and an existential threat from a foreign enemy.

As one of his most brilliant critics, James Buchanan, pointed out (Democracy in Deficit), the risk was that irresponsible politicians would misunderstand Keynes and adopt a culture of fiscal irresponsibility in which deficits would spiral dangerously out of control. Keynes would, of course, never have approved of this. But the irresponsible politicians that Buchanan envisioned are with us now.

The age of the new Keynesians has arrived, and the culprits are, alas, the same people who used to attack Keynesian economics so fervently. The truth is that they didn’t understand Keynes when they criticized him and they still don’t understand him as they embrace attitudes they previously attacked and attributed to him. We’re talking about some truly dim bulbs. And, tragically, they occupy the pinnacles of power in a period of time when their views go effectively unchecked. They relish deficits and they have developed a new form of state-economy: the core area of government services is replaced by corporate vehicles, close to those in power, which subsist almost entirely off the state purse. It’s close to the nighmarish view of a Bertolt Brecht play. And the governing attitude is “après moi, le deluge.” But the downpour is already starting, and they’re not gone yet.

The leader of this pack is Vice President Dick Cheney, a man often mistakenly lauded for his business acumen and common sense. Of course, those who took a close look at Cheney’s tenure as CEO of a Fortune 500 company know his stewardship was extremely shaky. He bailed himself out through a merger with Dresser Industries in which Dresser executives suggest they were misled about the scope of Halliburton’s losses and deceived by the company’s lack of transparency. He also had Halliburton change its accounting practices in order to cover up substantial losses it sustained while he was at the helm. Do these techniques sound familiar? If you project them on to the national stage, you get Bush economics from the last seven years. And is there any question about Cheney’s critical role in all of this?

Bush’s first Treasury Secretary, Paul O’Neill, wrote that he had a terrible sinking feeling during an early cabinet meeting. He quotes Cheney

“You know, Paul, Reagan proved that deficits don’t matter. We won the mid-term elections, this is our due.” … O’Neill was speechless.

“It was not just about not wanting the tax cut. It was about how to use the nation’s resources to improve the condition of our society,” says O’Neill. “And I thought the weight of working on Social Security and fundamental tax reform was a lot more important than a tax reduction.”

And Bush, O’Neill said, was far from a forceful leader. In fact he seemed indifferent to these issues:

The president was “like a blind man in a roomful of deaf people. There is no discernible connection,” forcing top officials to act “on little more than hunches about what the president might think.”

This is what produced the staggering deficits of the Bush years, one of the most sordid of many facts that surround it, and one which the mainstream media is happy to ignore.

But it may be forced to do so. The country is now in the grips of a recession. Most likely in roughly three months, experts will look back and see that the recession began in late 2007. Markets around the world are already acting on that assumption. And how does Bush propose to work his way out of it?

He talks about the country spending its way out, of course. He proposes tax cuts, and still larger deficits. It’s like a man returning home from a visit to his doctor at which he’s been diagnosed with severe arterial blockage and a chronic cholesterol problem, and ordering a steak, French fries and high-fat ice cream for dessert. Let’s just do things that will make my base happy, he says. The car is going over the cliff, and the accelerator is pressed to the floor. Let’s not lose sight of the man behind the wheel or the hefty figure at his side. Accountability time is approaching, and it won’t be a pleasant affair for any of us.

“He could be one of a million beach-bound, black-socked Florida retirees, not the man who, by some odd happenstance of life, possesses the brain of Albert Einstein — literally cut it out of the dead scientist's head.”